Cavo Corporation expects an EBIT of $15,600 every year forever. The company curr
ID: 2646084 • Letter: C
Question
Cavo Corporation expects an EBIT of $15,600 every year forever. The company currently has no debt, and its cost of equity is 10 percent. The corporate tax rate is 35 percent.
What is the current value of the company? (Round your answer to 2 decimal places. (e.g., 32.16))
Suppose the company can borrow at 7 percent. What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Suppose the company can borrow at 7 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Cavo Corporation expects an EBIT of $15,600 every year forever. The company currently has no debt, and its cost of equity is 10 percent. The corporate tax rate is 35 percent.
Explanation / Answer
Given EBIT =$15,600
As there is no debt, EBIT is nothing earning before tax.
Given tax =35%
EBT -Tax = Profit after tax.
$15,600 - $5,460 =$10,140
Given cost of capital =10%.
Hence, current value of the company = $10,140 / 10% =$101,400
Answer for subpoint b) 1):
Debt 40% of $101,400 = $40,560
Interest @7% = $2,839.2
Value of firm = $8294.52/10% + Value of debt
=$82,945.2+$40,560 (1-.35)
=$82,945.20 +$26,364
=$109,309.20
Value of firm = $109,309.20 .
Answer for Question b2:
Interest @ 7% *101,400 =$7,098
Value of the firm = $5,526.30/10% + $101,400 (1-0.35)
=$55,263+$65,910
=$121,173
Value of the fim=$121,173.
Particulars Amount EBIT $15,600.00 Minus Interest $2,839.20 Earning before tax $12,760.80 Tax @35% $4,466.28 Earning after tax $8,294.52 Cost of equity 10%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.